The Company accounts for income taxes in accordance with ASC Topic 740 “Income Taxes.” These standards establish financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. The Company takes an asset and liability approach for financial accounting and reporting of income taxes. The Company pays income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions between the Company and its foreign affiliates. Deferred tax assets and liabilities are created in this process. The Company has netted these deferred tax assets and deferred tax liabilities by jurisdiction. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized. The Company had net deferred tax assets of $27.1$21.3 million and $34.8$24.1 million as of June 30, 20212022 and December 31, 2020,2021, respectively.
The Company evaluates its indefinite reinvestment assertions with respect to foreign earnings for each quarter. For all foreign earnings, the Company accrues the applicable foreign income taxes. For the earnings that have been indefinitely reinvested, the Company does not accrue foreign withholding taxes. Undistributed earnings that the Company has indefinitely reinvested, for which no foreign withholding taxes have been provided, aggregate to $60.0 million as of December 31, 2020.2021. If the amount designated as indefinitely reinvested as of December 31, 20202021 was repatriated to the United States, the amount of incremental taxes would be approximately $6.0 million. The Company intends to utilize the indefinitely reinvested offshore earnings to fund foreign investments, specifically capital expenditures.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws and include, but are not limited to, statements of management’s expectations regarding our performance, initiatives, strategies, product introductions and offerings, growth, opportunities and risks; statements of projections regarding future sales, expenses, operating results, taxes and duties, capital expenditures, sources and uses of cash, foreign-currency fluctuations or devaluations, repatriation of undistributed earnings, and other financial items; statements of management’s expectations and beliefs regarding our markets and global economic conditions; statements regarding the payment of future dividends and stock repurchases; statements regarding the outcome of litigation, audits, investigations or other regulatory actions; statements regarding government policies and regulations relating to our industry, including government policies and regulations in Mainland China; accounting estimates and assumptions; statements of belief; and statements of assumptions underlying any of the foregoing. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “optimistic,” “project,” “anticipate,” “determine,” “estimate,” “intend,” “plan,” “goal,” “objective,” “targets,” “become,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. For a summary of these risks, see the risk factors included in our Annual Report on Form 10-K for the 20202021 fiscal year and in our subsequent quarterly and other reports, including this Quarterly Report.
The following Management’s Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the 20202021 fiscal year, and our other reports filed with the Securities and Exchange Commission through the date of this Quarterly Report.
Overview
Revenue for the three-month period ended June 30, 2021 increased 15%2022 decreased 20% to $704.1$560.6 million, compared to $612.4$704.1 million in the prior-year period, and revenue for the six-month period ended June 30, 2021 increased 22%2022 decreased 16% to $1.4$1.2 billion, compared to $1.1$1.4 billion in the prior-year period. Our revenue in the second quarter and first half of 2022 was negatively impacted 5% and 4%, respectively, from foreign-currency fluctuations. Our Customers, Paid Affiliates and Sales Leaders increased 15%declined 6%, 16% and Customers decreased 2%24%, respectively, on a year-over-year basis. Our reported revenue benefited 6% from foreign-currency fluctuations for both periods presented of 2021.
Our results continue to benefit from our strategic shift to become a more digital business with continued growth from social commerce,second quarter and our Sales Leaders have been able to leverage the powerfirst half of social sharing to achieve greater levels of productivity. If and when the COVID-19 pandemic subsides, there is uncertainty as2022 revenue was softer than anticipated primarily driven by COVID-related factors in Mainland China, distractions in EMEA related to the impact on trends towards online shoppingongoing conflict in Russia and how our business would be impacted by changes in those trends. Our 15% revenue growth was driven by solid growth in our Americas/Pacific and EMEA segments, where our Brand Affiliates have more broadly adopted social commerce to share our products. The pandemic negatively impacted our Asia markets more heavily, as our sales force generally relies more on in-person meetings in those marketsUkraine, and the social sharing model is less mature. Our revenuegeneral global economic downturn. Despite these continuing headwinds, we are optimistic about our EmpowerMe personalized beauty and Sales Leaders also benefitted from Sales Leaders initiatives duringwellness strategy with the quarter. Our Customers declined 2%, primarily due to a significant surge in the prior year. We are continuing theexpected launch of the ageLOC Boost;LumiSpa iO at the date of this report, the Boost is now generally available for purchase in all of our eastern markets, with EMEA and US slated for the back half of 2021. Also, in the back half of the year, we are beginning our launch process of our two new products Beauty Focus Collagen+ and ageLOC Meta, with both being generally available for purchase in 2022.year.
Earnings per share for the second quarter of 2021 increased2022 decreased 42% to $1.15,$0.67, compared to $0.81$1.15 in the prior-year period. Earnings per share for the first six months of 2021 increased 79%2022 decreased 31% to $2.06,$1.43, compared to $1.15$2.06 in the prior-year period. The increasedecrease in earnings per share for the second quarter and first half of 2022 was primarily driven by the increasedecrease in revenue improvedalong with a decline in gross margin from lower freight expense as a percentage of revenue and favorable product mix, and a decrease in selling expense as a percent of revenue. The increase in earnings per share for the first half of 2021 was driven by the increase in revenue and fixed nature of general and administrative expenses on the increased revenue.sales promotions.
In August 2022, management approved a restructuring plan for the second half of 2022. The charges are expected to be approximately $30 million for the third quarter of 2022 and $35–$45 million for the second half of 2022. These charges will predominantly be recorded in restructuring and impairment, as part of operating income. The plan includes approximately $30–$35 million of cash charges related to severance and lease termination cost and approximately $5–$10 million of non-cash impairment charges of fixed assets related to the footprint optimization.
20
Segment Results
We report our business in tennine segments to reflect our current management approach. These segments consist of our seven geographic Nu Skin segments—Americas, Mainland China, Americas/Southeast Asia/Pacific, South Korea, Southeast Asia, Japan, EMEA, and Hong Kong/Taiwan, and EMEA—Taiwan—and our three Rhyz Investment segments—Manufacturing Grow Tech and Rhyz other. The Nu Skin other category includes miscellaneous corporate revenue and related adjustments. The Rhyz other categorysegment includes other investments by our Rhyz strategic investment arm, which were entered into during the second quarter of 2021.
The following table sets forth revenue for the three- and six-month periods ended June 30, 20212022 and 20202021 for each of our reportable segments (U.S. dollars in thousands):
| | Three Months Ended June 30, | | | | | | Constant- Currency | | | Six Months Ended June 30, | | | | | | Constant- Currency | | |
| | 2021 | | | 2020 | | | Change | | | Change (1) | | | 2021 | | | 2020 | | | Change | | | Change (1) | | | Three Months Ended June 30, | | | | Constant- Currency | | | Six Months Ended June 30, | | | | Constant- Currency | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | Change | | | Change(1) | | 2022 | | 2021 | | Change | | | Change(1) | |
Nu Skin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | | $ | 124,445 | | | $ | 138,512 | | | (10 | )% | | (9 | )% | | $ | 248,025 | | | $ | 272,273 | | | (9 | )% | | (8 | )% |
Mainland China | | $ | 154,182 | | | $ | 146,332 | | | | 5 | % | | | (4 | )% | | $ | 303,775 | | | $ | 284,028 | | | | 7 | % | | | (2 | )% | | 86,808 | | | 154,182 | | | (44 | )% | | (42 | )% | | 211,303 | | | 303,775 | | | (30 | )% | | (31 | )% |
Americas/Pacific | | | 151,730 | | | | 127,919 | | | | 19 | % | | | 14 | % | | | 301,195 | | | | 202,492 | | | | 49 | % | | | 45 | % | |
Southeast Asia/Pacific | | | 94,067 | | | 83,968 | | | 12 | % | | 16 | % | | 184,303 | | | 167,257 | | | 10 | % | | 14 | % |
South Korea | | | 88,604 | | | | 76,915 | | | | 15 | % | | | 6 | % | | | 169,735 | | | | 152,634 | | | | 11 | % | | | 3 | % | | 69,308 | | | 88,604 | | | (22 | )% | | (12 | )% | | 141,441 | | | 169,735 | | | (17 | )% | | (8 | )% |
Japan | | | 55,952 | | | 68,020 | | | (18 | )% | | (3 | )% | | 117,743 | | | 137,884 | | | (15 | )% | | (3 | )% |
EMEA | | | 83,115 | | | | 50,776 | | | | 64 | % | | | 49 | % | | | 159,295 | | | | 86,179 | | | | 85 | % | | | 69 | % | | 50,871 | | | 83,115 | | | (39 | )% | | (31 | )% | | 103,839 | | | 159,295 | | | (35 | )% | | (28 | )% |
Southeast Asia | | | 70,751 | | | | 66,829 | | | | 6 | % | | | 2 | % | | | 138,336 | | | | 136,415 | | | | 1 | % | | | (2 | )% | |
Japan | | | 68,020 | | | | 68,291 | | | | — | | | | 1 | % | | | 137,884 | | | | 129,591 | | | | 6 | % | | | 6 | % | |
Hong Kong/Taiwan | | | 38,529 | | | | 37,161 | | | | 4 | % | | | — | | | | 74,874 | | | | 72,988 | | | | 3 | % | | | (1 | )% | �� | | 39,327 | | | 38,529 | | | 2 | % | | 6 | % | | 77,821 | | | 74,874 | | | 4 | % | | 6 | % |
Nu Skin other | | | 755 | | | | (85 | ) | | | 988 | % | | | 988 | % | | | 1,460 | | | | 688 | | | | 112 | % | | | 112 | % | | | 1,318 | | | | 947 | | | 39 | % | | 39 | % | | | 1,938 | | | | 1,825 | | | 6 | % | | 6 | % |
Total Nu Skin | | | 655,686 | | | | 574,138 | | | | 14 | % | | | 8 | % | | | 1,286,554 | | | | 1,065,015 | | | | 21 | % | | | 15 | % | | 522,096 | | | 655,877 | | | (20 | )% | | (15 | )% | | 1,086,413 | | | 1,286,918 | | | (16 | )% | | (12 | )% |
Rhyz Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | | 48,140 | | | | 37,918 | | | | 27 | % | | | 27 | % | | | 94,125 | | | | 65,065 | | | | 45 | % | | | 45 | % | | 38,229 | | | 48,140 | | | (21 | )% | | (21 | )% | | 78,570 | | | 94,125 | | | (17 | )% | | (17 | )% |
Grow Tech | | | 191 | | | | 310 | | | | (38 | )% | | | (38 | )% | | | 364 | | | | 314 | | | | 16 | % | | | 16 | % | |
Rhyz other | | | 38 | | | | — | | | | | | | | | | | | 38 | | | | — | | | | | | | | | | | | 290 | | | | 38 | | | 663 | % | | 663 | % | | | 531 | | | | 38 | | | 1,297 | % | | 1,297 | % |
Total Rhyz Investments | | | 48,369 | | | | 38,228 | | | | 27 | % | | | 27 | % | | | 94,527 | | | | 65,379 | | | | 45 | % | | | 45 | % | | | 38,519 | | | | 48,178 | | | (20 | )% | | (20 | )% | | | 79,101 | | | | 94,163 | | | (16 | )% | | (16 | )% |
Total | | $ | 704,055 | | | $ | 612,366 | | | | 15 | % | | | 9 | % | | $ | 1,381,081 | | | $ | 1,130,394 | | | | 22 | % | | | 16 | % | | $ | 560,615 | | | $ | 704,055 | | | (20 | )% | | (15 | )% | | $ | 1,165,514 | | | $ | 1,381,081 | | | (16 | )% | | (12 | )% |
(1) | Constant-currency revenue change is a non-GAAP financial measure. See “Non-GAAP Financial Measures,” below. |
The following table sets forth segment contribution for the three- and six-month periods ended June 30, 20212022 and 20202021 for each of our reportable segments (U.S. dollars in thousands). Segment contribution excludes certain intercompany charges, specifically royalties, license fees, transfer pricing and other miscellaneous items. We use segment contribution to measure the portion of profitability that the segment managers have the ability to managecontrol for their respective segments. The prior year segment contribution has been recast for the fourth quarter of 2021 exit of the Grow Tech segment and the expense has been recast to Corporate and other. For additional information regarding our segments and the calculation of segment contribution, see Note 10 to the consolidated financial statements contained in this report.
| | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | | |
| | 2021 | | | 2020 | | | Change | | | 2021 | | | 2020 | | | Change | | | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | |
Nu Skin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | | $ | 30,026 | | | $ | 28,998 | | | 4 | % | | $ | 55,149 | | | $ | 57,743 | | | (4 | )% |
Mainland China | | $ | 51,480 | | | $ | 43,668 | | | | 18 | % | | $ | 90,919 | | | $ | 81,055 | | | | 12 | % | | 12,945 | | | 51,480 | | | (75 | )% | | 41,940 | | | 90,919 | | | (54 | )% |
Americas/Pacific | | | 32,106 | | | | 25,791 | | | | 24 | % | | | 64,250 | | | | 37,071 | | | | 73 | % | |
Southeast Asia/Pacific | | | 24,367 | | | 21,213 | | | 15 | % | | 47,773 | | | 40,861 | | | 17 | % |
South Korea | | | 28,892 | | | | 24,090 | | | | 20 | % | | | 55,417 | | | | 48,189 | | | | 15 | % | | 20,578 | | | 28,892 | | | (29 | )% | | 43,321 | | | 55,417 | | | (22 | )% |
Japan | | | 13,451 | | | 16,461 | | | (18 | )% | | 28,764 | | | 34,442 | | | (16 | )% |
EMEA | | | 13,681 | | | | 3,342 | | | | 309 | % | | | 22,577 | | | | 3,973 | | | | 468 | % | | 6,162 | | | 13,681 | | | (55 | )% | | 9,998 | | | 22,577 | | | (56 | )% |
Southeast Asia | | | 18,105 | | | | 16,977 | | | | 7 | % | | | 34,354 | | | | 33,695 | | | | 2 | % | |
Japan | | | 16,461 | | | | 16,455 | | | | — | | | | 34,442 | | | | 31,047 | | | | 11 | % | |
Hong Kong/Taiwan | | | 8,560 | | | | 6,839 | | | | 25 | % | | | 15,908 | | | | 13,777 | | | | 15 | % | | | 9,161 | | | | 8,560 | | | 7 | % | | | 17,851 | | | | 15,908 | | | 12 | % |
Total Nu Skin | | | 169,285 | | | | 137,162 | | | | 23 | % | | | 317,867 | | | | 248,807 | | | | 28 | % | | 116,690 | | | 169,285 | | | (31 | )% | | 244,796 | | | 317,867 | | | (23 | )% |
Rhyz Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | | 6,764 | | | | 5,402 | | | | 25 | % | | | 12,590 | | | | 8,251 | | | | 53 | % | | 1,188 | | | 6,764 | | | (82 | )% | | 4,480 | | | 12,590 | | | (64 | )% |
Grow Tech | | | (6,980 | ) | | | (5,487 | ) | | | (27 | )% | | | (13,071 | ) | | | (12,337 | ) | | | (6 | )% | |
Rhyz other | | | (519 | ) | | | — | | | | | | | | (519 | ) | | | — | | | | | | | | (1,299 | ) | | | (519 | ) | | (150 | )% | | | (2,345 | ) | | | (519 | ) | | (352 | )% |
Total Rhyz Investments | | | (735 | ) | | | (85 | ) | | | (765 | )% | | | (1,000 | ) | | | (4,086 | ) | | | 76 | % | | $
| (111 | ) | | $
| 6,245 | | | (102 | )% | | $
| 2,135 | | | $
| 12,071 | | | 82 | % |
The following table providestables provide information concerning the number of Customers, Paid Affiliates and Sales Leaders as ofin our core Nu Skin business for the three-month periods ended June 30, 20212022 and 2020. “Customers” are persons who have purchased products directly from2021. During the Company duringfirst quarter of 2022, in connection with the three months ended asintroduction of the date indicated. Our Customer numbers do not include consumers who purchase products directly from membersnew metric Paid Affiliates, we reviewed how we currently present Sales Leaders and adjusted that metric’s definition to what we believe provides a better insight into the trends of our sales force. “Sales Leaders” are independent distributors, and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements.business. The definition of our Customer metric remained unchanged. We have recast the 2021 Sales Leaders to the new definition.
| | As of June 30, 2021 | | | As of June 30, 2020 | | | % Increase (Decrease) | |
| | Customers | | | Sales Leaders | | | Customers | | | Sales Leaders | | | Customers | | | Sales Leaders | |
| | | | | | | | | | | | | | | | | | |
Mainland China | | | 328,526 | | | | 18,647 | | | | 321,946 | | | | 17,104 | | | | 2 | % | | | 9 | % |
Americas/Pacific | | | 397,685 | | | | 13,078 | | | | 424,236 | | | | 10,787 | | | | (6 | )% | | | 21 | % |
South Korea | | | 153,287 | | | | 7,935 | | | | 159,926 | | | | 6,881 | | | | (4 | )% | | | 15 | % |
EMEA | | | 261,857 | | | | 7,900 | | | | 247,057 | | | | 5,120 | | | | 6 | % | | | 54 | % |
Southeast Asia | | | 135,610 | | | | 7,141 | | | | 155,822 | | | | 6,790 | | | | (13 | )% | | | 5 | % |
Japan | | | 125,791 | | | | 6,053 | | | | 125,332 | | | | 6,011 | | | | — | | | | 1 | % |
Hong Kong/Taiwan | | | 64,861 | | | | 3,474 | | | | 65,581 | | | | 3,343 | | | | (1 | )% | | | 4 | % |
Total | | | 1,467,617 | | | | 64,228 | | | | 1,499,900 | | | | 56,036 | | | | (2 | )% | | | 15 | % |
| ● | “Customers” are persons who have purchased directly from the Company during the three months ended as of the date indicated. Our Customer numbers include members of our sales force who made such a purchase, including Paid Affiliates and those who qualify as Sales Leaders, but they do not include consumers who purchase products directly from members of our sales force. |
| ● | “Paid Affiliates” are any Brand Affiliates, as well as sales employees and independent marketers in Mainland China, who earned sales compensation during the three-month period. In all of our markets besides Mainland China, we refer to members of our independent sales force as “Brand Affiliates” because their primary role is to promote our brand and products through their personal social networks. |
| ● | “Sales Leaders” are the three-month average of our monthly Brand Affiliates, as well as sales employees and independent marketers in Mainland China, who had achieved certain qualification requirements as of the end of each month of the quarter. |
| | Three Months Ended June 30, | | | | |
Customers | | 2022 | | | 2021 | | | Change | |
Americas | | | 302,849 | | | | 368,052 | | | | (18 | )% |
Mainland China | |
| 392,268 | | | | 328,526 | | | | 19 | % |
Southeast Asia/Pacific | | | 152,775 | | | | 165,221 | | | | (8 | )% |
South Korea | | | 135,290 | | | | 153,282 | | | | (12 | )% |
Japan | | | 122,643 | | | | 125,734 | | | | (2 | )% |
EMEA | | | 205,379 | | | | 261,881 | | | | (22 | )% |
Hong Kong/Taiwan | | | 69,411 | | | | 64,861 | | | | 7 | % |
Total | | | 1,380,615 | | | | 1,467,557 | | | | (6 | )% |
| | Three Months Ended June 30, | | | | |
Paid Affiliates | | 2022 | | | 2021 | | | Change | |
Americas | | | 44,523 | | | | 53,492 | | | | (17 | )% |
Mainland China | |
| 19,257 | | | | 39,889 | | | | (52 | )% |
Southeast Asia/Pacific | | | 41,512 | | | | 44,734 | | | | (7 | )% |
South Korea | | | 48,605 | | | | 52,680 | | | | (8 | )% |
Japan | | | 38,269 | | | | 38,623 | | | | (1 | )% |
EMEA | | | 32,323 | | | | 42,682 | | | | (24 | )% |
Hong Kong/Taiwan | | | 17,644 | | | | 17,815 | | | | (1 | )% |
Total | | | 242,133 | | | | 289,915 | | | | (16 | )% |
| | Three Months Ended June 30, | | | | |
Sales Leaders | | 2022 | | | 2021 | | | Change | |
Americas | | | 9,320 | | | | 11,752 | | | | (21 | )% |
Mainland China | |
| 11,458 | | | | 20,946 | | | | (45 | )% |
Southeast Asia/Pacific | | | 8,407 | | | | 8,190 | | | | 3 | % |
South Korea | | | 6,557 | | | | 7,701 | | | | (15 | )% |
Japan | | | 6,097 | | | | 6,057 | | | | 1 | % |
EMEA | | | 5,192 | | | | 8,002 | | | | (35 | )% |
Hong Kong/Taiwan | | | 3,054 | | | | 3,446 | | | | (11 | )% |
Total | | | 50,085 | | | | 66,094 | | | | (24 | )% |
Following is a narrative discussion of our results in each segment, which supplements the tables above.
Mainland ChinaAmericas. The increasedecline in revenue, Customers, Paid Affiliates and Sales Leaders in our Americas segment is predominantly attributable to the continued macro economic challenges in our Latin America markets. Our U.S. market's revenue increased 6% for the second quarter of 2022 and first six months of 2021, is attributable to the 9% benefit from favorable foreign-currency fluctuations for both periods presented. Our Mainland China market continues to stabilize from effects of the restrictions on in-person meetings that began in 2019 based on government direction and continued through 2020 with the global pandemic. Our Sales Leaders increased 9%, benefiting from new Sales Leaders initiatives.
The year-over-year increase in segment contribution10% for the second quarter and first six months of 2021 is attributable to increased reported revenue and a 2.0 percentage point and a 2.1 percentage point improvement, respectively, in gross margin from a favorable product mix and decrease in freight expense to customers. The second quarter of 2021 also reflects a one-time benefit related to payroll taxes which resulted in lower general and administrative expenses.
Americas/Pacific. Our Americas/Pacific segment continued to benefit from greater adoption of innovative products shared increasingly via the social commerce business model supported by our digital tools, which drove increased revenue in the second quarter and first half of 2021. The new social and digital tools as well as strong sales leadership in social sharing in these markets have enabled our sales force to more effectively transact business digitally. These factors also led to an increase in Sales Leaders. Our reported revenue also reflects a 5% and 4% benefit2022 from favorable foreign-currency fluctuations forcontinued momentum, specifically from the launch of Beauty Focus Collagen+ during the second quarter and first half of 2021, respectively. Our Customers decreased 6%2021; the recent launch of Nu Biome, primarily attributableour latest wellness product aimed at aiding digestion to our Argentina market. Our Argentina market continues to experience economic instability from hyperinflation, which led to a 73%help maintain your overall gut health; and 56% decline in revenue for the second quarter and first half of 2021, respectively, along with a 77% decline in Customers and a 66% decline in Sales Leaders.continued social adoption.
The year-over-year increase in segment contribution for the second quarter and first half of 2021 primarily reflects2022 is partially attributable to the increase in revenue and a 2.3 percentage point and 1.4 percentage point improvement, respectively, in gross margin from product mix and less freight expense. The first half of 2021 also benefited from the fixed nature of general and administrativeour U.S. market, which has more favorable margins than our Latin American markets. In addition, our selling expenses which as a percentage of revenue decreased 1.84.5 percentage points.points, primarily from a product mix shift to products with a lower commission percentage. In addition, with the decline in revenue and Sales Leaders, the expense associated with incentive trips decreased as well. The decline in segment contribution for the first half of 2022 is primarily attributable to the decline in revenue and higher sales promotions in the first quarter of 2022, partially offset by the increase in revenue in our U.S market.
South KoreaMainland China. Our South KoreaMainland China market continuescontinued to improve and benefited from successful product promotions and Sales Leader initiatives which contributed to a 15% increase in revenue for the second quarter and 15% increase in Sales Leaders. Our reported revenue reflects a 9% benefit and an 8% benefit from favorable foreign-currency fluctuations forbe challenged during the second quarter and first half of 2021, respectively.2022, with COVID-related lockdowns and other factors negatively impacting our selling and promotional activities. Due to increasing COVID-19 cases, the government implemented more significant lockdowns that precluded gatherings and meetings for the general population in Shanghai and other areas. As previously disclosed, we anticipate that COVID-related challenges will persist throughout 2022. During the second quarter, our Customers increased 19% primarily from customer promotions and launch of digital tools.
During July 2022, we resumed allowing Sales Leader meetings in this market on a limited basis, so long as they are in compliance with government regulations and related controls that we have implemented. In our Quarterly Report on Form 10-Q for the 2022 first quarter, we referenced government inquiries related to a meeting in a hotel in Wuhan, Hubei Province organized by an independent marketer of Nu Skin China. The work on these inquiries was affected by the lockdowns in Mainland China, which delayed the inquiries from being closed during the second quarter; however, we continue to believe we are in the final stages of the process to close these matters. We believe the regulatory environment in Mainland China is becoming increasingly challenging and will continue to be so over the medium and long terms.
The year-over-year increase in segment contribution primarily reflects the increased revenue, along with improvements in gross margin, from a shift to more favorable margin products.
EMEA. Our EMEA segment’s strong revenue trends continued into the second quarter and first half of 2021, benefiting from further adoption of the social sharing business model supported by our digital tools. During the second quarter we began the ageLOC Boost launch process, with a strong Sales Leader introduction, generating $11.1 million in sales. These factors contributed to a 64% and 85% increase in revenue for the second quarter and first half of 2021, respectively and a 54% increase in Sales Leaders. Our reported revenue also benefited 15% and 16% from foreign-currency fluctuations for the second quarter and first half of 2021, respectively. Similar to our Americas/Pacific segment, the strong sales leadership in social sharing has allowed the EMEA segment to more effectively transact business digitally.
The strong improvementdecrease in segment contribution for the second quarter and first half of 2021 is 2022 primarily attributable to higher revenue reflects lower revenue. The decrease also reflects the following: (a) a 5.5 and the fixed nature of general and administrative expenses. In addition,3.9 percentage point decrease in gross margin improved for the second quarter and first half of 20212022, respectively, primarily from favorableincreased product promotions and discounts during the second quarter of 2022, along with a shift in product mix, fromwhere a higher proportion of devices were sold in the Boost launch.period and increased freight charges; (b) an increase in general and administrative expenses as a percentage of revenue, due to the fixed nature of these expenses; and (c) an increase in selling expense as a percentage of revenue. The salaries and service fees of our Sales Leaders in Mainland China are fixed until they are adjusted in a quarterly evaluation process. As a result, we have variations in our selling expenses as a percentage of revenue, particularly when there is a sequential change in revenue.
Southeast AsiaAsia/Pacific. The year-over-year increase inOur Southeast Asia/Pacific segment revenue increased 12% and 10% for the second quarter and first half of 2021 primarily reflects2022, respectively, including a benefit4% negative impact from favorable foreign currency fluctuations. Sales Leader initiativesunfavorable foreign-currency fluctuations for both periods presented. The increase in revenue was partially driven by strong product launches of ageLOC Meta (locally referred to as ageLOC Reset in the Southeast Asia markets), which generated approximately $18.2 million in revenue for the second quarter and a virtual Sales Leader event$31.4 million in revenue for the first half of 2022, along with loosening of COVID restrictions in the markets. Our product launches and promotions during the quarter were focused on re-energizing our existing Sales Leaders, which led to a 5% increase in Sales Leaders. The decrease in Customers for the Southeast Asia segment was primarily attributable to the COVID-19 restrictions that still remain in place, as well as a decline in our Vietnam market, which is primarily from prior-year regulatory pressures that continue to impact our Customer numbers.Customers and Paid Affiliates.
The year-over-year increase in segment contribution for the second quarter and first half of 2021is primarily reflects the increase in revenue.
Japan. We remain encouraged by the increasingly younger demographic that is adept at social sharing. Our first quarter product launches, including ageLOC Boost and restages of other product lines, ledattributable to a 6% year-over-year increase inhigher revenue, for the first half of 2021, while the second quarter was flat.
The year-over-year increase in segment contribution for the first half of 2021 primarily reflects the increased revenue, a slight decline in selling expense as a percent of revenue from normal fluctuations andalong with the fixed nature of general and administrative expenses on increased revenue.
South Korea. The second quarter and first half of 2022 decline in revenue was predominantly driven by a 10% and 9% negative impact from unfavorable foreign-currency fluctuations. Our South Korea segment remained challenged from the ongoing COVID-related issues, leading to declines in revenue, Customers, Paid Affiliates and Sales Leaders.
The year-over-year decrease in segment contribution is primarily from a decline in revenue, along with a 2.0 and 1.5 percentage point increase in selling expenses as a percent of revenue for the second quarter and first half of 2022.
Japan. The decline in revenue is primarily attributable to a 15% and 12% unfavorable foreign-currency fluctuations for the second quarter and first half of 2022.
The year-over-year decline in segment contribution is primarily from the decline in revenue.
EMEA. The continued softening of momentum in our EMEA segment, further driven by the current geopolitical Russian/Ukraine conflict which has caused distraction to our sales force in the segment, led to a decline in revenue, Customers, Paid Affiliates and Sales Leaders. Our reported revenue was also negatively impacted from foreign-currency fluctuations. We have suspended business operations in Ukraine, and are closing our market in Russia. The Russia and Ukraine markets have historically accounted for less than 1% of our consolidated revenue. We look forward to our upcoming product introductions in the region but remain cautious in the near term given the macro environment.
The year-over-year decline in segment contribution reflects the decline in revenue along with a lower gross margin from unfavorable product mix and increased promotions, and the fixed nature of general and administrative expenses with a decline in revenue.
Hong Kong/Taiwan. Our Hong Kong /Taiwan segment revenue increased 4%2% for the second quarter and 3%4% for the first half of 2021, with2022. The increase in revenue is primarily from revenue growth in our Taiwan market from social selling. Our Customers also increased 7%, from the social selling growth in our Taiwan market. Our Hong Kong market continues to be challenged from the ongoing pressures from COVID-19, which led to a 4% benefit from favorable foreign-currency fluctuations for both periods presented. The fourth quarter of 2020 product launches drove an increasedecline in Sales Leaders which increased 4% as of the second quarter of 2021, compared to the prior-year period.and Paid Affiliates.
The increase in segment contribution wasfor both periods presented, is primarily driven by reportedfrom the increase in revenue growth,along with decreases in general and administrative expenses, remaining flat on slightly improved revenue.from effective cost saving measures.
Manufacturing. Our Manufacturing segment continues to generate strong results with a 27% year-over-year increase in revenue declined 21% for the second quarter and a 45% increase17% for the six-month period ended June 30, 2021. Our continued investmentsfirst half of 2022, primarily due to our customers rebalancing their inventory from higher levels in additional capacity have allowed our manufacturing companies to increase revenue as the2021, reducing demand for nutrition and personal care products continues to expand.the first half of 2022.
The 25% increase and 53% increasedecline in segment contribution foris attributable to the three- and six-month periods ended June 30, 2021, respectively, reflectlower revenue increases.on fixed costs, along with the revenue mix between our manufacturing entities with different profitability.
Grow Tech. Our Grow Tech segment continues to invest in controlled-environment agriculture technologies. We have found this technology has broader applications in agriculture, and we are investing to pursue this potential opportunity. We are expecting continued losses in 2021 from this segment as we continue to research and refine the technology. We are currently evaluating strategic alternatives with respect to this business.
Consolidated Results
Revenue
Revenue for the three-month period ended June 30, 2021 increased 15%2022 decreased 20% to $704.1$560.6 million, compared to $612.4$704.1 million in the prior-year period. Revenue for the six-month period ended June 30, 2021 increased 22%2022 decreased 16% to $1.4$1.2 billion compared to $1.1$1.4 billion. Our reported revenue also benefited 6%was negatively impacted 5% and 4% from foreign-currency fluctuations for boththe three- and six-month periods presented of 2021.ended June 30, 2022, respectively. For a discussion and analysis of these increasesdecreases in revenue, see “Overview” and “Segment Results,” above.
Gross profit
Gross profit as a percentage of revenue was 75.6%73.6% for the second quarter of 2021,2022, compared to 74.8%75.6% for the prior-year period, and 75.2%73.4% for the first six months of 2021,2022, compared to 75.2% for the prior-year period. Gross profit as a percentage of revenue for core Nu Skin increased 0.7decreased 1.3 percentage points to 78.3%77.0% for the second quarter of 20212022 and increased 0.3decreased 1.4 percentage points to 78.1%76.7% for the first halfsix months of 2021. Our2022. The decline in our Nu Skin gross profit benefitted from a favorable product mix, along with lower freight as a percentagemargin is predominantly attributable to an increase in sales promotions, specifically of revenue.our ageLOC LumiSpa devices in preparation of the launch of the ageLOC LumiSpa iO, which begins in the third quarter of 2022.
Selling expenses
Selling expenses as a percentage of revenue were 39.5%decreased to 39.1% for the second quarter of 2021,2022, compared to 40.6%39.9% for the prior-yearprior year period, and 39.9%decreased to 39.6% for the first six months of 2021,2022, compared to 40.2%40.3% for the prior-year period. Core Nu Skin selling expenses as a percentage of revenue decreased 0.90.8 percentage points to 42.4%42.0% for the second quarter of 20212022 and increased 0.2decreased 0.8 percentage points to 42.9%42.5% for the first halfsix months of 2021.2022. Selling expenses for our core Nu Skin business are driven by the specific performance of our individual Sales Leaders. Given the size of our sales force and the various components of our compensation and incentive programs, selling expenses as a percentage of revenue typically fluctuate plus or minus approximately 100 basis points from period to period.
General and administrative expenses
General and administrative expenses increaseddecreased to $168.8$141.6 million in the second quarter of 2021,2022, compared to $151.6$166.1 million in the prior-year period and increaseddecreased to $338.6$290.1 million in the first halfsix months of 2021,2022, compared to $301.2$333.7 million in the prior-year period. The $37.4$24.5 million increasedecrease for the second quarter of 2022 was primarily from a $15.8 million contraction in labor expenses from lower employee performance incentive compensation, along with our fourth quarter of 2021 exit of the Grow Tech segment, which led to $7.0 million less expense for the second quarter of 2022. The $43.6 million decrease for the first six months of 2022, was primarily from a $27.4 million contraction in labor expenses from lower employee performance incentive compensation, along with our fourth quarter of 2021 exit of the Grow Tech segment, which led to $13.1 million less expense for the first half of 2021 was mainly driven by a $18.7 million increase in labor expenses, attributable to higher employee performance incentive compensation, and approximately $7.4 million in increased IT expenses, associated with our cloud transition and ongoing development of digital tools. The increase for the second quarter is mainly driven by $4.4 million in increased IT expenses, along with a $4.6 million increase in labor expense.2022. General and administrative expenses as a percentage of revenue decreasedincreased to 24.0%25.3% for the second quarter of 2021,2022, from 24.7%23.6% for the prior-year period, and decreased to 24.5%24.9% for the first halfsix months of 2021,2022, from 26.6%24.2% for the prior-year period.
Other income (expense), net
Other income (expense), net was $(4.0)$(8.6) million for the second quarter of 20212022 compared to $1.6$(4.0) million for the prior-year period, and $(2.4)$(10.1) million for the first halfsix months of 20212022 compared to $(4.6)$(2.4) million for the prior-year period. The increasedecrease in expenseother income for the second quarter primarily relatesis predominately from a $5.7 million unrealized investment loss related to $3.3 million from foreign-currency fluctuations along with a loss on asset disposal. The decreasecontrolled environment agriculture company we invested in expense for the first halfas part of our previous Grow Tech segment. Following our fourth quarter of 2021 primarily relatesexit from the Grow Tech segment, we are in the process of exiting our investment. In addition, we recorded a $3.0 million increase in foreign currency losses during the second quarter of 2022 compared to the prior-year period, partially offset by a decrease$1.6 million decline in interest expense from lower interest rates.the contingent consideration associated with our previous acquisition, due to current period changes in our assumptions and forecast.
Provision for income taxes
Provision for income taxes for the three- and six-month periods of 2021ended June 30, 2022 was $8.7 million and $20.6 million, respectively, compared to $22.0 million and $39.1 million, compared to $17.8 million and $28.5 million for the prior-year periods. The effective tax rates for the three- and six-month periods ended June 30, 2022 were 27.1%20.2% and 26.8%22.0% of pre-tax income compared, respectively, to 29.8%27.1% and 31.6%26.8% in the prior-year periods. The decrease in the effective tax rate for the second quarter and first six monthshalf of 20212022 primarily reflects the strong growth in the U.S. market, and Manufacturing segment, which enabled us to utilize additional foreign tax credits to offset the U.S. income taxes.
Net income
As a result of the foregoing factors, net income for the second quarter of 20212022 was $59.3$34.2 million, compared to $41.9$59.3 million in the prior-year period. Net income for the first six months of 20212022 was $106.8$73.0 million, compared to $61.6$106.8 million for the first six months of 2020.2021.
Liquidity and Capital Resources
Historically, our principal uses of cash have included operating expenses (particularly selling expenses) and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, and debt repayment and the development of operations in new markets.repayment. We have at times incurred long-term debt, or drawn on our revolving line of credit, to fund strategic transactions, stock repurchases, capital investments and short-term operating needs. We typically generate positive cash flow from operations due to favorable margins and have generally relied on cash from operations to fund operating activities. In the first six months of 2021,2022, we generated $1.9$54.1 million in cash from operations, compared to $166.1$1.9 million in cash from operations during the prior-year period. The decreaseincrease in cash flow from operations primarily reflects aan approximate $32.2 million decline in inventory during the period, compared to an inventory increase of $80.2 million increase in inventorythe prior year period, partially attributable to a strategic decision to shift back to ocean freight from air freight, resulting in more inventory in our supply chain, along with increases at our manufacturing entities to support the revenue growth. Our cash from operations was also impactedoffset by the lower revenue and a decrease in accrued expenses from the first half of 2022 payout of our fourth quarter of 2021 payout of the accrued commission and accrued employee incentive payments attributable to our fourth-quarter growth. We generated $20.7 million in cash from operations in the second quarter of 2021.restructuring cost. Cash and cash equivalents, including current investments, as of June 30, 20212022 and December 31, 20202021 were $379.3$381.8 million and $423.9$354.8 million, respectively, with the decreaseincrease being driven by purchasescash from operations, increased debt following our debt modification during the second quarter of property2022, and equipment,cash received from the exercise of employee stock options, partially offset by capital expenditures, as discussed below, our quarterly dividend payments, stock repurchases and acquisitions, partially offset by increased borrowings underpayment on liabilities associated with our revolving credit facility.fourth quarter 2021 restructuring.
Working capital. As of June 30, 2021,2022, working capital was $345.2$498.8 million, compared to $360.3$343.3 million as of December 31, 2020.2021. The declineincrease in working capital is primarily attributable to our second quarter debt modification, which resulted in a net $120.0$52.5 million increaseof incremental borrowings, while our short-term debt decreased $67.5 million. Our working capital also benefited from a $83.1 million reduction in borrowings under our revolving credit facility duringaccrued expenses, primarily from the first half of the year to fund our acquisitions2022 pay-out of restructuring cost and stock repurchases and other expenses for operations,employee incentive accruals, partially offset by increaseda $45.7 million decrease in inventory.
Capital expenditures. Capital expenditures for the six months ended June 30, 20212022 were $36.8$19.8 million. We expect that our capital expenditures in 20212022 will be primarily related to:
| ● | the expansion and upgrade of facilities in our various markets; |
| ● | purchases and expenditures for computer systems and equipment, software, and application development; |
| ● | the expansion and upgrade of facilities in our various markets; and |
| ● | a new manufacturing plant in Mainland ChinaChina. |
We estimate that capital expenditures for the uses listed above will total approximately $80–95$70–90 million for 2021.2022. We are currently in the building phaseexpecting to complete construction of the new manufacturing plant in Mainland China. To dateChina in the back half of 2022. As of June 30, 2022, we have spent approximately $28$40.5 million on this project, with $3.2 million in the first half of 2022 and expect that our expenditures for this project will total approximately $55$52-57 million, over the next 1-2 years, including approximately $25-30$15-20 million during 2021.2022.
Credit Agreement. In April 2018,On June 14, 2022, we entered into aan Amended and Restated Credit Agreement (the “Credit Agreement”) with various financial institutions as lenders and Bank of America, N.A., as administrative agent. The Credit Agreement provides for a $400.0 million term loan facility and a $350.0$500.0 million revolving credit facility, each with a term of five years. We used the proceeds of the term loan and the draw on the revolving facility to pay off the previous credit agreement, and the outstanding balance on the convertible notes.agreement. The interest rate applicable to the facilities is subject to adjustments based on our consolidated leverage ratio. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 2.5% during the first year and 5.0% during the first and secondsubsequent years 7.5% during the third and fourth years and 10.0% during the fifth year after the closing date of the Credit Agreement, with the remainder payable at final maturity. As of June 30, 2021 and December 31, 2020,2022, we had $120.0$30.0 million and noof outstanding borrowings under our revolving credit facility, and $322.5$400.0 million and $337.5 million remaining balance on our term loan facility. The carrying value of the debt also reflects debt issuance costs of $(1.7) million and $(2.1)$(2.8) million as of June 30, 2021 and December 31, 2020, respectively,2022, related to the Credit Agreement. The Credit Agreement requires us to maintain a consolidated leverage ratio not exceeding 2.25 to 1.00 and a consolidated interest coverage ratio of no less than 3.00 to 1.00. We are currentlyAs of June 30, 2022, we were in compliance with all debt covenants under the Credit Agreement. We are planning to refinance our Credit Agreement within the next twelve months.
Modification of previous credit agreement. On June 14, 2022, we repaid our outstanding debt under our credit agreement, dated as of April 18, 2018, with several financial institutions as lenders and Bank of America, N.A., as administrative agent. We had indebtedness of $70.0 million on our revolver as of December 31, 2021, and $307.5 million on our term loan as of December 31, 2021.
Derivative Instruments. As of June 30, 2021,2022, we had four interest rate swaps, with a total notional principal amount of $200 million and a maturity date of July 31, 2025. We entered into these interest rate swap arrangements during the third quarter of 2020 to hedge the variable cash flows associated with our variable-rate debt under the Credit Agreement.
Stock repurchase plan. In 2018, our board of directors approved a stock repurchase plan authorizing us to repurchase up to $500.0 million of our outstanding shares of Class A common stock on the open market or in private transactions. During the first halfsecond quarter of 2021,2022, we repurchased approximately 1.20.2 million shares of our Class A common stock under the plan for $60.4$10.0 million. As of June 30, 2021, $265.42022, $225.4 million was available for repurchases under the plan. Our stock repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives.
Dividends. In February and May 2021,2022, our board of directors declared quarterly cash dividends of $0.38$0.385 per share. These quarterly cash dividends of $19.3 million and $19.0$19.4 million were paid on March 10, 20219, 2022 and June 9, 20218, 2022 to stockholders of record on February 26, 202128, 2022 and May 28, 2021.27, 2022. In August 2021,2022, our board of directors declared a quarterly cash dividend of $0.38$0.385 per share to be paid on September 8, 20217, 2022 to stockholders of record on August 27, 2021.26, 2022. Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other relevant factors.
Cash from foreign subsidiaries. As of June 30, 20212022 and December 31, 2020,2021, we held $379.3$381.8 million and $423.9$354.8 million, respectively, in cash and cash equivalents, including current investments. These amounts include $321.2$257.2 million and $374.7$274.9 million as of June 30, 20212022 and December 31, 2020,2021, respectively, held in our operations outside of the U.S. Substantially all of our non-U.S. cash and cash equivalents are readily convertible into U.S. dollars or other currencies, subject to procedural or other requirements in certain markets, as well as an indefinite-reinvestment designation, as described below.
We typically fund the cash requirements of our operations in the U.S. through intercompany dividends, intercompany loans and intercompany charges for products, use of intangible property, and corporate services. However, some markets impose government-approval or other requirements for the repatriation of dividends. For example, in Mainland China, we are unable to repatriate cash from current operations in the form of dividends until we file the necessary statutory financial statements for the relevant period. As of June 30, 2021,2022, we had $67.9$56.6 million in cash denominated in Chinese RMB. We also have experienced delays in repatriating cash from Argentina. As of March 31, 2021June 30, 2022 and December 31, 2020,2021, we had $10.6$12.6 million and $10.6$11.3 million, respectively, in intercompany receivablereceivables with our Argentina subsidiary. We also have intercompany loan arrangements within some of our markets, including Mainland China, that allow us to access available cash, subject to certain limits in Mainland China and other jurisdictions. We also have drawn on our revolving line of credit to address cash needs until we can repatriate cash from Mainland China or other markets, and we may continue to do so. Except for $60.0 million of earnings in Mainland China that we designated as indefinitely reinvested during the second quarter of 2018, we currently plan to repatriate undistributed earnings from our non-U.S. operations as necessary, considering the cash needs of our non-U.S. operations and the cash needs of our U.S. operations for dividends, stock repurchases, capital investments, debt repayment and strategic transactions. Repatriation of non-U.S. earnings is subject to withholding taxes in certain foreign jurisdictions. Accordingly, we have accrued the necessary withholding taxes related to the non-U.S. earnings.
We currently believe that existing cash balances, future cash flows from operations and existing lines of credit will be adequate to fund our cash needs on both a short- and long-term basis. The majority of our historical expenses have been variable in nature, and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds in the debt or equity markets or restructuring our current debt obligations. Additionally, we would consider realigning our strategic plans, including a reduction in capital spending, stock repurchases or dividend payments.
Contingent Liabilities
Please refer to Note 11 to the consolidated financial statements contained in this Quarterly Report for information regarding our contingent liabilities.
Critical Accounting Policies and Estimates
There were no significant changes in our critical accounting policies or estimates during the second quarter of 2021.2022.
Seasonality and Cyclicality
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third quarter, when many individuals, including our sales force, traditionally take vacations.
Prior to making a key product generally available for purchase, we may do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders, a limited-time offer, or other product introduction or promotion. These offerings may generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue, Sales Leaders and/or Customers during the quarter and can skew year-over-year and sequential comparisons.
Non-GAAP Financial Measures
Constant-currency revenue change is a non-GAAP financial measure that removes the impact of fluctuations in foreign-currency exchange rates, thereby facilitating period-to-period comparisons of the Company’s performance. It is calculated by translating the current period’s revenue at the same average exchange rates in effect during the applicable prior-year period and then comparing that amount to the prior-year period’s revenue. We believe that constant-currency revenue change is useful to investors, lenders and analysts because such information enables them to gauge the impact of foreign-currency fluctuations on our revenue from period to period.
Available Information
Our website address is www.nuskin.com. We make available, free of charge on our Investor Relations website, ir.nuskin.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We also use our Investor Relations website, ir.nuskin.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Currency Risk and Exchange Rate Information
A majority of our revenue and many of our expenses are recognized outside of the United States, except for inventory purchases, a significant portion of which are primarily transacted in U.S. dollars from vendors in the United States. The local currency of each of our Subsidiaries’ primary markets is considered the functional currency with the exception of our Asia product-distribution subsidiary in Singapore and, as discussed below, our subsidiary in Argentina. All revenue and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. These impacts may be significant because a large portion of our business is derived from outside of the United States. Given the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition.
In the second quarter of 2018, published inflation indices indicated that the three-year cumulative inflation in Argentina exceeded 100 percent, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiary in Argentina. Under highly inflationary accounting, the functional currency for our subsidiary in Argentina became the U.S. dollar, and the income statement and balance sheet for this subsidiary have been measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other income (expense), net and was not material. As of June 30, 2021,2022, our subsidiary in Argentina had a small net peso monetary position. Net sales of our subsidiary in Argentina were less than 2% of our consolidated net sales for the three- and six-month periods ended June 30, 20212022 and 2020.2021.
We may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts and through intercompany loans of foreign currency. We do not use derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of June 30, 20212022 and 2020,2021, we did not hold material non-designated mark-to-market forward derivative contracts to hedge foreign denominated intercompany positions or third party foreign debt. As of June 30, 2021,2022, and 20202021 we did not hold any material forward contracts designated as foreign currency cash flow hedges. We continue to evaluate our foreign currency hedging policy.
For additional information about our market risk see Note 9 to the consolidated financial statements contained in this Quarterly Report.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of June 30, 2021.2022.
Changes in Internal Controls Over Financial Reporting.
We made no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 20212022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
There have been no material developments concerning the matters discussed in the “Legal Proceedings” section of our Annual Report on Form 10-K for the 20202021 fiscal year. Please refer to Note 11 to the consolidated financial statements contained in this report for certain information regarding our legal proceedings.
The information presented below supplements and should be read in conjunction with the detailed discussion of risks associated with our business in our recent SEC filings, including our Annual Report on Form 10-K for the
20202021 fiscal year and subsequent reports.
LawsIf we are unable to retain our existing sales force and regulationsrecruit additional people to join our sales force, our revenue may prohibit or severely restrictnot increase and may even decline.
Our products are primarily marketed by our sales force, and we depend on them to generate virtually all of our revenue. Our sales force may terminate their services at any time, and like most direct selling companies, we experience high turnover among our sales force from year to year. People who join our company to purchase our products for personal consumption or for short-term income goals frequently only stay with us for a short time. Sales Leaders who have committed time and causeeffort to build a sales organization will generally stay for longer periods. To increase our revenue, we must increase the number of and/or the productivity of our sales force. We must also expand our outreach and profitabilityoutbound efforts to decline,attract, connect and regulators could adoptnurture new regulations that harm our business.customers for a wider consumer base who purchase product and whom we can foster along a consumer journey to promote retention and higher lifetime value.
Various government agencies throughoutWe have experienced periodic fluctuations in both Sales Leaders and Customers in the world regulate direct sales practices. Lawspast and regulationscould experience such fluctuations again in Japan, South Korea andthe future. For example, our Sales Leaders in Mainland China are particularly stringentdeclined 46% from December 31, 2018 to December 31, 2019 due to such factors as meeting restrictions and subjectnegative media scrutiny. Our ability to broad discretionretain our Sales Leaders and Customers could be affected as our sales force makes increased use of social sharing channels, which may allow them to more easily engage their consumers and sales network in enforcement by regulators. These lawsother opportunities. If our initiatives do not drive growth in both Sales Leaders and regulations are generally intendedCustomers, our operating results could be harmed. While we take many steps to prevent fraudulent or deceptive schemes, often referredhelp train, motivate and retain our sales force, we cannot accurately predict how the number and productivity of our sales force may fluctuate because we rely primarily upon our Sales Leaders to as “pyramid schemes,” that compensate participants primarily for recruiting additional participants without significant emphasis on product salesfind new consumers and to consumers. The lawsfind, train and regulationsdevelop new Sales Leaders. Our operating results could be harmed if we and our Sales Leaders do not generate sufficient interest in our current markets often:business and its products to retain and motivate our existing sales force and attract new people to join our sales force.
The number and productivity of our sales force is negatively impacted by several additional factors, including:
| ● | impose requirements relatedany adverse publicity or negative public perception regarding us, our products or ingredients, our distribution channel, or our industry or competitors; |
| ● | lack of interest in, dissatisfaction with, or the technical failure of, existing or new products; |
| ● | lack of compelling products or income opportunities, including through our sales compensation plans and incentive trips and other offerings; |
| ● | negative sales force reaction to sign-up, order cancellations,changes in our sales compensation plans or to our failure to make changes that would be necessary to keep our compensation competitive with the market; |
| ● | interactions with our company, including our actions to enforce our policies and procedures and the quality of our customer service; |
| ● | any regulatory actions or charges against us or others in our industry, as well as regulatory changes that impact product returns, inventory buy-backsformulations and cooling-off periods forsales viability; |
| ● | general economic, business, public health and geopolitical conditions, including employment levels, employment trends such as the gig and sharing economies, pandemics or other conditions that curtail person-to-person interactions, and the ongoing conflict in Russia and Ukraine which has caused distraction to our sales force; |
| ● | changes in the policies of social media platforms used to prospect or recruit potential consumers and sales force participants; |
| ● | our and our sales force’s ability to provide a positive customer experience and to facilitate customer loyalty; |
| ● | recruiting efforts of our competitors and changes in consumer-loyalty trends; and |
| ● | potential saturation or maturity levels in a given market, which could negatively impact our ability to attract and retain our sales force in such market. |
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to risks associated with our international operations, including:
| ● | the possibility that a government might ban or severely restrict our sales compensation and consumers;business models; |
| ● | requirethe possibility that local civil unrest, political instability, or changes in diplomatic or trade relationships might disrupt our operations in one or more markets—for example, the ongoing conflict in Russia and Ukraine has caused distraction to our sales force; |
| ● | the lack of well-established or reliable legal systems in certain areas where we operate; |
| ● | the presence of high inflation in the economies of international markets in which we operate; |
| ● | the possibility that a government authority might impose legal, tax, customs, or other financial burdens on us or our sales force, due, for example, to register with government agencies;the structure of our operations in various markets; |
| ● | the possibility that a government authority might challenge the status of our sales force as independent contractors or impose limitsemployment or social taxes on the amount ofour sales compensation we can pay; |
| ● | impose reporting requirements;force; and |
| ● | requirethe possibility that governments may impose currency remittance restrictions limiting our sales force is compensated primarily for selling products and not for recruiting others.ability to repatriate cash. |
Complying with these widely varying and sometimes inconsistent rules and regulations can be difficult, time-consuming and expensive, and may requireThere has been an increasing level of tension in U.S.-China relations over the last few years. Given the significant resources. The laws and regulations governing direct selling are modified from time to time, and like other direct selling companies, we are subject from time to time to government inquiries and investigations insize of our various markets related to our direct selling activities. This can require us to make changes toChina business, our business model and aspects of our sales compensation plan in the markets impacted by such changes and investigations. In June 2021, the U.S. Federal Trade Commission (“FTC”) announced that it is initiating a review of its Business Opportunity Rule, which imposes certain obligations on business opportunity sellers in their dealings with prospective buyers. Currently, multi-level marketing companies are exempted from this rule. If this exemption is eliminated or if new regulations are adopted for multi-level marketing companies, it could negatively impact the growth of our sales force and our revenue. In addition, markets where we currently do business could change their laws or regulations to prohibit direct selling. If we are unable to obtain necessary licenses and certifications within required deadlines or continue business in existing markets or commence operations in new markets because of these laws, our revenue and profitability may decline. Any delay could negatively impact our revenue.
Epidemics, including the recent outbreak of COVID-19, and other crises have and may continue to negatively impact our business.
Due to the person-to-person nature of direct selling, our results of operations have been, and will likely continue to be harmed if the fearrelations continue to deteriorate or additional sanctions or restrictions are imposed by either government. In addition, there have been adverse public reaction and media attention to statements made by representatives of a communicable and rapidly spreading disease or other crises such as natural disasters result in travel restrictions or cause people to avoid group meetings or gatherings or interaction with other people. It is difficult to predict the impact on our business, if any, of the emergence of new epidemics or other crises. The outbreak of COVID-19 and resulting pandemic resulted in significant contraction of economies around the world and interrupted global supply chains as many governments issued stay-at-home orders to combat COVID-19. Government-imposed restrictions and public hesitance regarding in-person gatherings, travel and visiting public places have reduced our sales force’s ability to hold sales meetings, resulted in cancellations of key sales leader events and incentive trips, and required us to temporarily close our walk-in and fulfillment locations in some markets where we have such properties. The outbreak has also impacted our ability to obtain some ingredients and packaging as well as ship products in some markets. Our supply chain and logistics have incurred some interruptions and cost impacts to date, and we could experience more significant interruptions and cost impacts or face more significant closures in the future. These factors and other eventsbusinesses related to COVID-19these issues that have negatively impacted our salesadversely affected business. We could similarly face adverse public or media attention, and operations and will likely continue to negatively affect our business and our financial results. Although some of the negative impacts of COVID-19 have recently improved, this situation continues to be fluid and there is uncertainty regarding its duration and future impacts. For example, the delta variant or other variants have caused some of the pandemic’s negative impacts to worsen or return. In addition, the productivity of our sales force could be negatively impacted as restrictions are lifted and our sales force is able to more freely travel and take vacations.
Any significant decline in our operating results in the future could also adversely affect our financial position and liquidity. Under the terms of our existing credit facility, we are required to maintain certain interest coverage and leverage ratios. In addition, our outstanding borrowings under our credit facility and related term loan impose debt service and amortization requirements. A significant deterioration in our results of operations in the futurepotentially increased regulatory scrutiny, as a result of the COVID-19 pandemic could impact our ability to comply with our financial covenants and debt service and amortization obligations, which could result in an event of default under the terms of our credit facility. An event of default under our credit facility could result in an inability to access funding under the agreement and the acceleration of our obligations, which would have a material adverse effect on our financial condition and liquidity.
In addition, regulatory authorities closely scrutinize the product- and earnings-related claims madeincreased trade or political tensions or any statements or actions by direct-selling companies and their sales force, including claims related to the COVID-19 pandemic. For example, during 2020, the FTC issued letters that warned several direct-selling companies to remove and address claims that theyemployees or members of their sales force were making about their products’ ability to treat or prevent COVID-19 and/or about the earnings that people who have recently lost income could make. Although we take steps to educate our Brand Affiliates on proper claims, if our Brand Affiliates make improper claims, or if regulators determine we are making any improper claims, this could lead to an FTC investigation and could harm our business and reputation.
Difficult economic conditions could harm our business.
Difficult economic conditions, such as high unemployment levels, inflation, or recession, could adversely affect our business by causing a decline in demand for our products, particularly if the economic conditions are prolonged or worsen. For example, an increase in oil prices would likely cause our shipping expenses to increase, which would negatively affect our profitability. In addition, economic conditions may adversely impact access to capital for us and our suppliers, may decrease the ability of our sales force and consumersthat generate publicity with respect to obtain or maintain credit cards, and may otherwise adversely impact our operations and overall financial condition. There also appears to be increased concerns about potential inflationary pressures, which could have a negative impact on our business if it impacts the discretionary spending of our consumers.these issues.
Our business could be negatively impacted by corporate citizenship and sustainability matters.
There are increased expectations and focus from certain investors, Brand Affiliates, consumers, employees and other stakeholders concerning corporate citizenship and sustainability matters, including environmental, social and governance matters; packaging; responsible sourcing; and diversity, equity and inclusion matters. From time to time, we announce certain initiatives and goals in these areas. We could fail, or be perceived to fail, in our achievement of such initiatives or goals or in stakeholders’ expectations, or we could fail in accurately reporting our progress on such initiatives, goals and expectations. Moreover, the standards by which corporate citizenship and sustainability efforts and related matters are measured are developing and evolving, and certain areas are subject to assumptions. The standards or assumptions could change over time. In addition, we could be criticized for the scope of our initiatives or goals or perceived as not acting responsibly in connection with these matters. Any such matters, or related corporate citizenship and sustainability matters, could have a material adverse effect on our business.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Purchases of Equity Securities by the Issuer
| | (a) | | | (b) | | | (c) | | | (d) | |
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(1) | |
| | | | | | | | | | | | |
April 1 - 30, 2021 | | | 115,209 | | | $ | 52.44 | | | | 115,209 | | | $ | 269.4 | |
May 1 - 31, 2021 | | | 66,299 | | | | 56.83 | | | | 66,299 | | | $ | 265.6 | |
June 1 - 30, 2021 | | | 3,215 | | | | 60.45 | | | | 3,215 | | | $ | 265.4 | |
Total | | | 184,723 | | | $ | 54.16 | | | | 184,723 | | | | | |
| | (a) | | | (b) | | | (c) | | | (d) | |
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(1) | |
| | | | | | | | | | | | |
April 1 - 30, 2022 | | | — | | | $ | — | | | | — | | | $ | 235.4 | |
May 1 - 31, 2022 | | | 109,818 | | | | 44.64 | | | | 109,818 | | | $ | 230.5 | |
June 1 - 30, 2022 | | | 112,017 | | | | 45.55 | | | | 112,017 | | | $ | 225.4 | |
Total | | | 221,835 | | | $ | 45.10 | | | | 221,835 | | | | | |
(1) | In August 2018, we announced that our board of directors approved a stock repurchase plan. Under this plan, our board of directors authorized the repurchase of up to $500 million of our outstanding Class A common stock on the open market or in privately negotiated transactions. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
On August 3, 2021, the Compensation and Human Capital Committee (the “Committee”) of1, 2022, we adopted a strategic plan to focus resources on the Company’s Boardstrategic priorities and optimize future growth and profitability. This global program includes workforce reductions and footprint optimization. We estimate total charges under the program will be approximately $35–$45 million, consisting of Directors adjusted$20–$25 million in cash severance payments, approximately $10 million in cash costs associated with lease terminations and $5–$10 million of non-cash charges of impairment of fixed assets related to the compensation of Mark H. Lawrence,footprint optimization. We expect that the Company’s Chief Financial Officer, due to additional responsibilities he recently assumed. Mr. Lawrence’s salary was increased to $575,000, effective September 1, 2021, andactions contemplated under the Committee currently anticipates increasing the grant value of Mr. Lawrence’s annual equity incentive award to approximately $1,300,000 inprogram will be substantially completed by December 31, 2022.
Exhibits Regulation S-K Number | | Description |
| | |
| | Amended and Restated Credit Agreement among the Company, various financial institutions, and Bank of America, N.A. as administrative agent, dated as of June 14, 2022 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 17, 2022). |
| | Certification by Ritch N. Wood,Ryan S. Napierski, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification by Mark H. Lawrence, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification by Ritch N. Wood,Ryan S. Napierski, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | Certification by Mark H. Lawrence, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 4, 2021
NU SKIN ENTERPRISES, INC.August 4, 2022 | |
| |
By: | /s/ Mark H. LawrenceNU SKIN ENTERPRISES, INC. | |
| | |
By: | /s/ Mark H. Lawrence | |
| Chief Financial OfficerMark H. Lawrence | |
| Chief Financial Officer | |
| (Duly Authorized Officer and Principal Financial Officer) | |
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